Oberwies Sees Stock Slump ‘Overreaction’ to Cash Squeeze

Chinese stocks are poised to rebound
from a one-month low as policy makers inject cash into the
financial system to stem a surge in interbank lending rates,
according to Oberweis Asset Management Inc.

The Shanghai Composite Index (SHCOMP) dropped the most since May
2011 last week and a Bloomberg gauge of the most traded Chinese
stocks in the U.S. fell to the lowest since Nov. 14 on concern
the cash squeeze will hamper growth in the world’s second-biggest economy.

The price declines are overdone because the central bank
will keep pumping money into the financial system to ease the
cash shortage like it did in June, according to Jeff Papp, a
senior analyst at Oberweis, which oversees $700 million in
assets. Bloomberg’s China-US index touched a two-year low in
June only to soar 27 percent over the next six months as the
seven-day repurchase rate jumped 328 basis points in the week,
the most since January 2011. The benchmark borrowing cost was
7.6 percent on Dec. 20.

“Markets tend to overreact to these spikes in rates,
similar to what we saw in June,” Jeff Papp, a Lisle, Illinois-based senior analyst at Oberweis, which oversees $700 million in
assets, said in an e-mail Dec. 20. “They will continue to
inject funds to bring things down to healthy levels. You have to
remember that the PBOC controls all this.”

Borrowing costs in China climbed in recent weeks as the
government shifted toward allowing market-determined interest
rates. The PBOC conducted more than 300 billion yuan ($49
billion) of short-term liquidity operations over three days, it
said Dec. 20 on its microblog.

NQ Retreats

The Bloomberg China-US gauge tumbled 1.6 percent in its
second weekly decline to 103.75 in New York on Dec. 20. The
slump trimmed its rally for the year to 4.6 percent. The Hang
Seng China Enterprises Index in Hong Kong sank 3.6 percent last
week to 10,628.50, the lowest since Nov. 14, while the Shanghai
Composite Index plunged 5.1 percent to a four-month low of
2,084.79.

Youku Tudou Inc. (YOKU), China’s largest video website operator,
fell 7.2 percent over the week, leading declines on the China-US
gauge. The retreat, the steepest in four months, pared the
Beijing-based company’s gain for the year to 57 percent.

Muddy Waters offered to pay for an accounting firm to
evaluate an independent committee’s investigation into NQ
Mobile, according to a letter published Dec. 19. NQ denied the
allegations and said last month its independent special
committee retained the law firm Shearman & Sterling LLP to
review Muddy Waters’s report.

“In the short term it’s a tightening on a lot of companies
that are publicly traded,” Michael Kass, a New York-based
portfolio manager at Baron Capital Inc., which manages $20
billion in assets including emerging-market stocks, said by
phone Dec. 20. “If you get a further credit tightening, which
is starting to play out now there, then it may not be that
optimistic for 2014.”

The iShares China Large-Cap ETF, the largest Chinese
exchange-traded fund in the U.S., tumbled 2.8 percent last week
to a one-month low of $37.32 in New York. The ETF has rebounded
18 percent from a low reached June 25.